Revealing Holes in the Three-tier System

Beer entrepreneurs build their businesses based on the rules of the game at the time of the building, especially since they work in such a highly regulated industry. Therefore, entrenched business interests run deep in any debate about changing those rules. After Prohibition, the federal government’s ratification of the 21st Amendment passed along the vast majority of alcohol regulation to the states. So some beer industry members (particularly brewers) could face more than 50 different (sometimes widely different) regulatory systems to guide their choices about how to start and grow their businesses. While a division of the Treasury Department deals with federal excise taxes, licensing and label approval for interstate commerce, states heap on their own tax regulations and permitting requirements, laws about business practices, relationships between tiers and on and on.

You’d be hard-pressed to find a state with a “pure” three-tier system these days: that is, where suppliers only sell to distributors that only sell to retailers. Over the years, holes of all sizes have been poked through “pure” three-tier at the state level by industry members asking for certain protections, rights or exemptions. All along, the historically minded pointed out that the creation of an independent middle tier of wholesalers, the very basis of the three-tier system, tempered any imbalance of power between tiers.

Recently, small brewers have been causing the lion’s share of the ruckus. Seeking three-tier exceptions to allow self-distribution or on-site sales, exemptions from tax requirements and the like, small brewers have gained traction across the United States by reminding legislators of their local focus and the jobs they create with their businesses. They’ve also become adept at gaining consumer support for overhauling “antiquated” laws that restrict them, a popular narrative beyond the beer biz.

But putting the cat back in the bag is difficult after the cat’s already chewed a few holes in it. As states create exceptions that make it easier for small brewers to open and operate, competing businesses in surrounding states exert pressure on their own legislatures to level the playing field. The changes spread. The more exceptions enacted that do not radically alter business environments, the more examples there are of “successes” and the more legislators feel comfortable with change.

One side cries “antiquated laws hinder our growth” and the other cries “changing the laws could damage my business.” Both can be true, if perhaps a touch disingenuous, as opposing sides will be quick to remind. Plenty of small brewers have developed highly successful businesses by operating within current, supposedly restrictive laws. It’s also unlikely that distributors will be crippled by changes, as they provide valuable services to brewers, who only rarely wish to be distributors, too. When sifting through all the rhetoric this legislative session, I for one will be looking into how counter-arguments (such as these) may hold the seeds of compromise. After all, it’s important to remember that in many of these situations, participants on either side of the debate are in business with each other to sell more beer.

But also don’t forget that beer is a form of alcohol. While we may not always be aware of them (and many may scoff when they are), folks interested in a much (much, much) more regulated alcohol industry are alive, kicking and screaming. Public health advocates repeatedly call for stricter regulation of price, place and promotion to hinder growth of the alcohol industry. Their arguments may seem absurd to some, but at the root of those arguments is a fear of alcohol-related harm that’s not to be scoffed at. As responsible, moderate beer drinkers, we often overlook the potential consequences of alcohol abuse. Some spend much time considering them.

It gets more complex. But these are some of the pressures that policymakers weigh when faced with potential changes to alcohol regulation. Having the best possible system may never come easily, with policy interests inextricably linked to business interests and a product scientifically linked to health, but here’s to trying.